The Pain of Paying: Why Credit Cards Make Us Spend More

Have you ever felt that through credit cards, you actually don't spend real money? That is a common feeling, and it is even true, as using credit cards involves borrowing money. A theory called the pain of paying can be used to explain this concept. It refers to the pain that one feels due to the loss of monetary resources to buy a good or service. This theory is dependent on three main pillars: transparency, concurrency, and physicality. Cash, being tangible, has greater sentiments attached to it, as by using it, you can see your wallet getting thinner. However, with credit cards, the same sentiments are not attached, which leads to increased willingness to spend, increased spending, reduced awareness of spending, reduced product attachment, increased impulsiveness and, of course, more debt. Moreover, the concept of buy now, pay later keeps the customer hooked, and the illusion of minimum payment with often hidden interests creates an illusion of control. In fact, according to a 2023 report by the Reserve Bank of India, average monthly credit card spending rose by 30% after digital payments became mainstream.

Yet, despite these psychological drawbacks, credit cards play a vital role in modern economies. They serve as a ready source of payment in the absence of cash in emergencies. Customers also get points by making credit card payments. Safety and reduction of the black economy are other notable advantages.

Traditionally, credit card ownership and economic growth go hand in hand. However, the COVID-19 pandemic revealed that despite the decline in consumption, penetration increased. COVID-19 restrictions and contactless shopping are major reasons for the same. Credit cards also facilitate access to international goods and boost liquidity in capital markets — without physically printing more money. Furthermore, central banks make huge financial savings in capital management of a nation through the use of credit cards. This increase in private consumption also increases the GDP of a country.

In conclusion, as long as you treat your credit card as real money and swipe it only when you are capable of repaying it, you, along with the national economy, will benefit.